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Unsecured Debt, Consumer Bankruptcy, and Small Business


  • Césaire A. Meh
  • Yaz Terajima


In this paper we develop a quantitative model of entrepreneurial activity (risk-taking) and consumer bankruptcy choices and use the model to study the effects of bankruptcy regulations on entrepreneurial activity, bankruptcy rate and welfare. We show that eliminating bankruptcy exemptions leads to a modest increase in the fraction of entrepreneurs, a large decrease in the overall bankruptcy rate and a significant welfare gain. In contrast, eliminating the whole consumer bankruptcy system leads to a large fall in the fraction of entrepreneurs and a substantial welfare loss. These two findings suggest that the consumer bankruptcy system is desirable but it must be well-designed with regard to bankruptcy asset exemptions. In particular, excessive bankruptcy exemptions can be counter-productive. Finally, we argue that entrepreneurial activity is important when studying different bankruptcy rules or regulations.

Suggested Citation

  • Césaire A. Meh & Yaz Terajima, 2008. "Unsecured Debt, Consumer Bankruptcy, and Small Business," Staff Working Papers 08-5, Bank of Canada.
  • Handle: RePEc:bca:bocawp:08-5

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    References listed on IDEAS

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    Cited by:

    1. Miguel García-Posada & Juan S. Mora-Sanguinetti, 2012. "Why do spanish firms rarely use the bankruptcy system? The role of the mortgage institution," Working Papers 1234, Banco de España;Working Papers Homepage.
    2. Miguel García-Posada & Juan Mora-Sanguinetti, 2014. "Are there alternatives to bankruptcy? A study of small business distress in Spain," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 5(2), pages 287-332, August.
    3. Fossen, Frank M., 2011. "Personal Bankruptcy Law, Wealth and Entrepreneurship: Theory and Evidence from the Introduction of a "Fresh Start"," IZA Discussion Papers 5459, Institute for the Study of Labor (IZA).
    4. Akyol, Ahmet & Athreya, Kartik, 2011. "Credit and self-employment," Journal of Economic Dynamics and Control, Elsevier, vol. 35(3), pages 363-385, March.
    5. repec:inu:caeprp:2014002 is not listed on IDEAS
    6. Gordon, Grey, 2017. "Optimal bankruptcy code: A fresh start for some," Journal of Economic Dynamics and Control, Elsevier, vol. 85(C), pages 123-149.
    7. Andrew Glover, 2010. "Bankruptcy, Incorporation, and the Nature of Entrepreneurial Risk," 2010 Meeting Papers 1010, Society for Economic Dynamics.
    8. Mette Ejrnæs & Stefan Hochguertel, 2014. "Insurance, Entrepreneurial Start-Up, and Performance," Tinbergen Institute Discussion Papers 14-040/V, Tinbergen Institute.
    9. Mankart, Jochen & Rodano, Giacomo, 2012. "Bankruptcy Law, Debt Portfolios, and Entrepreneurship," Economics Working Paper Series 1216, University of St. Gallen, School of Economics and Political Science.

    More about this item


    Economic models; Financial stability; Financial system regulation and policies;

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand

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